What is PITI? Mortgage payments explained

What is PITI? Mortgage payments explained

PITI is your 4-part monthly mortgage payment 

Your monthly mortgage payment can be broken down into four parts: principal, interest, taxes, and insurance. Together, these parts are known as “PITI.” Mortgage lenders look at your entire PITI payment, not just principal and interest, when they determine how big of a loan you qualify for. So you’ll want to factor in all four parts when you estimate your home buying budget. 

Verify your home buying eligibility (Oct 17th, 2020)

Mortgage escrow is how you pay your PITI 

A mortgage escrow account lets you pay all four parts of your PITI — principal, interest, taxes, and insurance — at once. If you have a mortgage escrow, you’ll pay your homeowners insurance and property taxes in monthly installments to your mortgage lender, along with your principal and interest, instead of paying the insurance company and tax agency directly. 

In this article (Skip to…) 

What Is PITI?

When you own a home, your fiscal responsibility goes deeper than just making monthly mortgage payments to the bank. Real estate taxes and homeowners insurance are required, too. 

These four components add up to your “PITI” — your total monthly payment as a homeowner: 

  • (P) Principal — The amount of your loan balance repaid each month
  • (I) Interest — The interest your mortgage lender collects on the loan 
  • (T) Taxes — Property taxes required by the government
  • (I) Insurance — Homeowners insurance and, if required, private mortgage insurance 

Finding your PITI is important for a number of reasons. It gives you a realistic budget for homeownership. 

And, PITI gives you an idea of how much mortgage you’ll qualify for. Therefore it’s a crucial number when you’re trying to figure out your home buying budget. 

How PITI affects your mortgage

When you get a mortgage, lenders have to verify your “ability to repay.” To make sure you’ll be able to afford your monthly mortgage payment, a lender is going to compare your projected PITI to your monthly income. 

You’ll only be approved for a mortgage if your PITI, combined with your existing monthly debts, takes up less than 43% of your gross income (or 50% in special cases). 

>> Related: Debt-to-income ratios explained

That’s why it’s important to consider all the costs of your mortgage when you’re estimating how much house you can afford. 

If you only look at principal and interest, and leave out taxes and insurance, you’ll come up with a significantly higher loan amount than you actually qualify for. Take a look at one example: 

  Principal & Interest ONLY Principal, Interest, Taxes, and Insurance (PITI) 
Current Monthly Debts $250 $250
Annual Income  $70,000 $70,000
Estimated Mortgage Payment  $1,850 $1,850
Estimated Home Buying Budget $523,070 $418,270

*Example assumes a 30-year rate loan with a fixed interest rate of 3.375% and a 20% down payment. 

In the example above, ignoring taxes and insurance adds over $100,000 to your home buying budget. 

It would be a sore disappointment to start house hunting based on those numbers, only to find out after speaking with a lender that your budget is $100,000 short of what you’d estimated. 

You can get a better estimate by using a mortgage calculator that includes principal, interest, taxes, and insurance — the entire PITI package. 

Read about:   The Final Information to FHA Loans

Verify your home buying eligibility (Oct 17th, 2020)

How to calculate your PITI correctly

You can use a calculator to easily estimate your PITI payment online. 

The number you get won’t be exact, because mortgage rates change every day, and your taxes and insurance will likely be estimated. But this will be a close enough figure to start budgeting off of.  

The first two parts of your PITI — principal and interest — are easiest to estimate. You can find today’s mortgage rates online. And when you use a calculator, your principal payments will be automatically calculated based on your loan amount. 

Figuring out your taxes and insurance is a little more involved. 

To estimate your property taxes, you’ll need to know the home’s value and local tax rate. You may already know the home’s value if you have your eye on a property. But you can also check public records online. And tax rates can be found on your local tax assessor or municipality website. 

See this helpful article on calculating your property taxes for more. 

To find out what your homeowners insurance premium will be, estimate 1% of the purchase price. This will yield an estimate which is likely larger than your actual premium, but when building a budget, it’s often better to estimate on the high side.

Next, divide your sum by the 12 months in a year.

As an example, a Bucks County, Pennsylvania home with an $8,400 annual tax bill and a $1,200 insurance policy will pay $9,600 annually. This yields $800 paid into escrow monthly as part of PITI.

These monies are paid along with the mortgage payment’s principal and interest portion.

Get a custom mortgage estimate today (Oct 17th, 2020)

PITI mortgage calculator

What is escrow? 

An escrow company is a neutral, third-party company that facilitates money changing hands during a big transaction. 

Escrow comes into play a couple different ways when you buy a house. 

During a home sale, there will be an escrow company involved that helps manage all the funds moving around — from earnest money to real estate agent commissions, inspectors, and profits from the home sale. 

You can learn more about how escrow works during a home sale here. 

In this article, we’re more concerned with how escrow works after a home sale, as it relates to PITI and mortgage payments. 

How mortgage escrow works 

If paid separately, the four parts of your PITI payment would have to be sent to separate collectors. 

Mortgage payments (consisting of principal and interest) are typically due monthly to your lender; real estate taxes are due to your local taxing authority; and homeowners insurance is due to your insurer.

But most homeowners pay all four components together to make the process easier. 

That’s where mortgage escrow comes in. 

A mortgage escrow account lets you pay all four parts of your PITI to your mortgage lender, instead of paying the homeowners insurance company and local tax authority separately. 

Using a mortgage escrow, you’ll make monthly payments toward your insurance and taxes just like you do with your principal and interest. All four parts are paid to your mortgage lender.

Read about:   NMP’s Legends of Lending: Quicken Loans Mortgage Services

The mortgage lender collects these funds in your escrow account, and uses them to pay the insurance company and tax collector as necessary, usually every six months. 

Why use an escrow account

By making a single PITI payment to your escrow account each month, you cover all your major homeownership costs at once. This reduces the hassle of managing your housing bills.

But there are other benefits of using a mortgage escrow, too. 

One is that you get to pay your taxes and insurance in monthly installments, rather than frontloading six months’ or a years’ worth of dues at once. That’s a more manageable way to make payments for many homeowners. 

But the biggest benefit is that homeowners who use an escrow account typically get lower mortgage rates. 

Since mortgage escrow is a less risky arrangement for lenders, they’re willing to offer better mortgage rates to borrowers who use escrow accounts. 

If you opt in for mortgage escrow, you’re likely to see a 0.125% to 0.25% lower interest rate than those who opt out. So it’s in your best interest, as well as your lender’s,  to pay your PITI using an escrow account.

Is mortgage escrow required? 

It might sound like a strange arrangement, but mortgage escrow is actually the norm. About 80% of homeowners pay their mortgage, taxes, and insurance using an escrow account, according to a 2017 study by CoreLogic. 

Whether or not you’re required to use a mortgage escrow account depends on what type of loan you have and how large your down payment is. 

  • Conventional loans (backed by Fannie Mae and Freddie Mac) — Escrow is required on all loans with less than 20% down. If you make a 20% or bigger down payment, you may opt out 
  • FHA loans — Escrow is required on all FHA loans 
  • VA loans — Escrow is not required by the VA, but many lenders do require escrow for VA loans 
  • USDA loans — Escrow is required for all USDA Rural Home Loans 

So, why do lenders sometimes require mortgage escrow? In short, because escrow lowers risk for mortgage companies. 

Taxes and insurance are crucial to your financial security as a homeowner — and by extension, to your lender’s financial security. 

If a homeowner doesn’t pay their property taxes, the government can seize the property and the mortgage lender could lose its money. 

Similarly, a lender can lose out if a homeowner fails to pay their insurance and the house sustains serious damage. 

That’s why lenders prefer mortgage escrow. It allows them to verify that homeowners are current on taxes and insurance so they can be sure their investments are protected. 

Mortgage payment FAQ

What is an escrow payment?

An escrow payment is a monthly payment to your mortgage company that includes principal and interest for your loan, as well as homeowners insurance, mortgage insurance, and property taxes. Escrow payments are an alternative to paying taxes and insurance separately. Not all homeowners are required to pay their mortgage using an escrow account, but about 80% do.

How is PITI calculated?

PITI is calculated by adding your monthly mortgage payment (including principal and interest) with your property taxes, homeowners insurance, and mortgage insurance. Homeowners insurance and property taxes often aren’t paid monthly, so divide the annual cost by 12 to get the right number for your PITI calculation. You can use a mortgage calculator with taxes, insurance, and HOA to estimate your PITI.

Is HOA included in PITI?

HOA dues are not included in the “PITI” acronym. However, PITI is meant to be an estimate of your total monthly housing costs — so it’s important to include HOA dues in that calculation. One key difference to note is that PITI (principal, interest, taxes, and insurance) can all be paid together each month via mortgage escrow, while HOA is typically paid directly to your homeowners association.

Does PITI include homeowners insurance?

Yes, PITI includes homeowners insurance. Instead of paying homeowners insurance directly to the insurer, most homeowners pay premiums to their mortgage company as part of their total PITI payment. Then the mortgage company takes care of paying the insurer, via a mortgage escrow account.

How does mortgage escrow work?

During a home sale, there will be an escrow company involved that handles all the money changing hands. The escrow company will hold earnest money, real estate commissions, inspector fees, profits from the home sale, and “prepaid items” (taxes and insurance paid in advance) until the sale is finalized. 

After you buy a home, escrow takes on a different meaning. For homeowners, an escrow account allows the mortgage lender to manage property taxes and insurance on your behalf. You simply pay everything to your lender as a monthly sum, and the lender forwards payments to the insurance company and tax authority via an escrow account.

Is escrow good or bad?

Using an escrow account to make your mortgage payments is typically good for homeowners. Escrow makes it easier to stay current on your accounts by paying your mortgage, property taxes, and homeowners insurance at the same time. In addition, homeowners who use mortgage escrow typically get 0.125%-0.25% lower mortgage rates than those who don’t. So you’ll actually save money with a mortgage escrow.

How can I avoid escrow on my mortgage?

If you use a conventional home loan and make a down payment of at least 20%, you’re not required to make payments to a mortgage escrow. In most other cases, mortgage escrow is required.

What Are Today’s Mortgage Rates?

Use today’s mortgage rates to calculate your future PITI payment. Get started below.

Verify your new rate (Oct 17th, 2020)